Do shareholders have standing to challenge the approval of a resolution plan?

The Hon’ble NCLAT in Dr. Ravi Shankar Vedam v. Tiffins Barytes Asbestos and Paints Limited (TA (AT) No. 134 of 2021) (“Tiffin”) while dismissing objections to a resolution plan held categorically and without qualification that “a Shareholder has no locus standi to challenge the Resolution Plan.” This finding is based on questionable reasoning and fails to adequately account for the unambiguous language of Section 61(1) which permits “any person aggrieved” to prefer an appeal to the NCLAT. Additionally, given that the NCLAT ultimately decides the shareholder's (who challenged the plan) objections on merits, one can only wonder why such a categorical finding was necessary or warranted.

In Tiffin, a shareholder challenged two interlocutory orders. The first decided an application that sought a forensic audit of the Corporate Debtor’s accounts and directions to maintain the status quo until the forensic audit was completed. The second decided the Section 30(6) application filed by the RP for approval of the Resolution Plan. The Appellants in Tiffin urged that the CIRP process had been vitiated because of suppression of material facts and severe procedural irregularities (a discussion of which is irrelevant for the present purpose). The NCLAT dismissed the appeal and upheld the plan.

All of which is fine. The interesting thing in Tiffin is that for whatever reason the NCLAT returns a detailed finding on the locus of the Appellant who was a shareholder in the Corporate Debtor. The NCLAT frames the following question for itself “whether a shareholder of the Corporate Debtor has locus standi, to challenge the Resolution Plan.” And answers the same in the negative.

Essentially the NCLAT observes that the explanation to Section 30(2) of the Code contemplates “deemed approval” on the part of shareholders of the Corporate Debtor. NCLAT goes on to say that such deemed approval cannot be taken away by objecting to a resolution plan. As a result, shareholders do not have any locus to challenge the plan. The explanation to Section 30(2)(e) reads as follows, ?“for the purposes of clause (e), if any approval of shareholders is required under the Companies Act, 2013(18 of 2013) or any other law for the time being in force for the implementation of actions under the resolution plan, such approval shall be deemed to have been given and it shall not be a contravention of that Act or law.” A mere explanation, intended to assure prospective resolution applicants that things which ordinarily require shareholder approval (for example reorganizing share capital, reduction in capital, change in authorized share capital, approval of schemes or appointment of directors) will be possible notwithstanding the requirements of shareholder approval under the Companies Act, 2013. This deemed approval is limited to the purpose of the Companies Act and cannot by any stretch be interpreted as taking away a shareholder’s locus standi.

Even otherwise, the explanation is clear, deemed approval is extended only to things requiring shareholder approval under the Companies Act, 2013 (or any other law), so even accepting the NCLATs reasoning, the deemed approval would not extend to an entire resolution plan, but just to the actions that require shareholding approval. This would mean that shareholders ought to be free to raise challenges on other parts of the plan which don’t require shareholder approval, such as on procedural impropriety or on the ground that a plan contravenes other provisions of law. Grounds which were invoked by the Appellant in Tiffin.?The NCLATs reasoning is also incorrect because it fails to acknowledge that other classes of stakeholders could also be shareholders. Directors of the Corporate Debtor or even creditors of the Corporate Debtor (pursuant to the conversion of debt into equity) can be shareholders. These directors or creditors in their capacity as shareholders, would, by following NCLATs reasoning, also be deemed to have approved the resolution plan and consequently stopped from challenging the plan at a later stage. Taking away their ability to raise a legitimate grievance. A position of law which is untenable.?

This reasoning also loses sight of Section 60(1) with Section 60(3) of the Code. Section 60(3) permits a plan to be challenged for the first time in the appellate stage. Section 60(1) of the Code allows “any persons aggrieved” to file an appeal against an NCLTs order. While Section 60(3) does not per se identify the persons that can file an appeal, at the very least it is apparent that any persons aggrieved as identified in Section 60(1) can file a proceeding challenging a plan approval order. The NCLAT decision interferes with this broad liberty, by in effect narrowing the scope of Section 60(1).

It is worth mentioning that the NCLAT also partly hinges on its decision on the fact that shareholders do not have a right to participate in the COC, a fact that is true for many other classes of persons that can presumably challenge a resolution plan.

?The notion that a resolution plan is deemed approved by the shareholders of the Corporate Debtor is an idea that finds no textual basis in the provisions of the Code. Nor is there any real reason to take away standing from shareholders, who may be able to point out that the plan falls foul of Section 30(2). ?The explanation to Section 30(2)(e) makes it clear that shareholder approval is no hurdle to plan implementation, Section 31 makes the plan binding on shareholders generally. Therefore, once a plan is approved under Section 30(6), it is completely binding on a shareholder. Moreover, Section 30 makes no specific provision for payments to shareholders who in any case find themselves at the back of the waterfall prescribed in Section 53. Shareholders who challenge the plan maliciously only for their monetary gain won’t be able to meet the strict standards of judicial review prescribed under Section 30(2) and Section 61(3) in any case. Given these facts, there is no reason to prohibit shareholders from even airing their grievances. ?